Tuesday, March 18, 2008

Dollar Doomsayers Draw Signs From Bernanke Rate

As a counterpoint to the post below.From Bloomberg:Ben S. Bernanke's interest-rate cuts have touched off a vicious circle of doom for the dollar.

The Federal Reserve reduced the rate on direct loans to commercial banks by a quarter-point to 3.25 percent before Asian financial markets opened today. It will likely lower its target rate for overnight loans between banks tomorrow to at least 2 percent from 3 percent, according to futures traded on the Chicago Board of Trade. Lower borrowing costs work against the dollar by making fixed-income securities issued by the government less appealing to global investors.

``The relative return on U.S. assets is not attractive enough and we have moved back into looking for dollar weakness,'' said Robert Robis, a bond fund manager in New York at OppenheimerFunds Inc., which oversees $260 billion. Robis last month was betting the dollar would rally versus the euro.

If that weren't enough to make bears out of bulls, the weakest dollar since at least 1971 based on a Fed trade-weighted index is helping push oil, grains and metals, which are priced in the U.S. currency, to record highs. That in turn is causing economists to lower growth forecasts for the U.S. and preventing central banks concerned that inflation is accelerating from cutting interest rates, further undermining the dollar.

``The whole world feels there's inflation when a good part of that is the weak dollar itself,'' said Stephen Jen, head of global foreign-exchange research at Morgan Stanley in London. ``Watching the dollar plummet like this is very dangerous.''>>>MORE

Apparently I'm not the only musing about the outlier scenario of a possible negative price spiral in oil markets. From Bloomberg:

"If the U.S. dollar turns higher or if the crude oil market reverses then we have a spiral working the other way,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. The price of crude oil will at $70 by September, Evans said.